When was the last time you actually looked at your estate plan?
Have you ever seen your parents’ estate plan?
Many people don’t like to even think about their parents aging and the eventual need for long-term care, much less their own. Changes in Medicaid eligibility requirements have taken place in the last four years or so that make this “ostrich approach” to one of life’s unpleasant facts a very expensive proposition.
These new rules for Medicaid eligibility took effect in February of 2006. If you haven’t taken a good look at how your estate plan (or your parents’) provides for potential long-term care needs, you could be in for a rude awakening when you actually need long-term care.
Here are few things you need to know:
The Potential Cost of Long-Term Care
Medicaid is a government program, paid for by federal and state funds, that is actually intended to provide health care for the poor. With the high cost of long-term care, it has also become the major source for paying for long-term care for the elderly. Medicaid pays almost half of all nursing home bills once residents have exhausted their own funds. Most state governments require that nursing home residents use up all their personal assets before they can qualify for Medicaid assistance.
The current national average cost for one year in a nursing home is $75,000.00. At that rate, it wouldn’t take long to wipe out a lifetime of saving. If you’re wise enough to plan ahead while you’re still healthy, you can buy long-term care insurance for as little as $2000.00 per year, depending on your age when you apply. However, if you’re thinking about coverage for your parents and their health is already declining, long-term care insurance may be cost prohibitive or they may not qualify for coverage.
One method of planning for these anticipated expenses has been to give away money and property to speed up qualification for Medicaid. You can set aside enough funds to pay for care and then establish an irrevocable trust to remove any remaining assets from your estate. If you plan to do that type of Medicaid planning, the new rules that started in February 2006 make it a little tougher to do.
Changes to the “Look Back” Period
Needless to say, the government does not want to pay for long-term care for people who have sheltered assets to avoid paying for their own care. The new rules extend what is called the “look back” period from three years to five years. What this means is that if you give away assets during the five year look back period, you are subject to a penalty period during which you are not eligible for government assistance.
Under the old rules, the penalty period started the day you transferred your assets so it usually expired long before you actually entered a nursing home and you would qualify for government aid. Now, the penalty period starts the day you apply for Medicaid and that means that you have already exhausted your assets and need government assistance (or you wouldn’t be eligible to apply in the first place). Ultimately, that means your family could be stuck paying for your care during the penalty period until you actually do qualify for Medicaid.
Creative Ways to Plan
You may be thinking that “I’m still fairly young and healthy. I won’t need long-term care for at least 20 years, much less five”. But that can change in the blink of an eye. And with your parents, health matters are even more susceptible to abrupt and unforeseen changes.
One way to plan for the eventual need for assistance is to set up an irrevocable trust now so that you can shelter assets and continue to live in your home or receive income from the trust. The five year look back period applies to all asset transfers, including trusts, so getting started now is a great way to plan for the future.
If you need care before the five year look back period expires, the beneficiaries of the trust can take an advance on their inheritance or sell the house to raise funds.If you need care after the five year look back expires, the assets in the trust are still protected and you are eligible for Medicaid as soon as the remaining unprotected assets are exhausted.
If by chance you have waited and you or your loved ones need long-term care now, ask about the possibility of a caregiver agreement. This allows you to pay an adult child (or your parent to pay you) for assistance for things like transportation to doctor appointments, housekeeping, etc. The amount that you pay is considered a wage, not a gift, so it draws down your assets to make you eligible for Medicaid and it is not subject to the restrictions on asset transfers. One thing to note is that the wage must be what you would pay someone else providing the same service and not something totally out of bounds compared with the national average.
Medicaid planning, as well as Will, Trust (if you own assets that would go through probate) and a Kids Protection Plan should be a part of your comprehensive estate plan. Nothing about the Medicaid application and/or benefits process is simple. In most cases, given the constantly changing rules and the complex formulas used to calculate benefit penalty periods, tax benefits vs. penalties, etc., the smart money is definitely on consulting an attorney and doing it sooner rather than later. If you wait until you’re actually in a situation where you need to apply for Medicaid coverage, you may have missed out on significant planning opportunities. Consulting a qualified estate planning attorney who can advise you on the entire situation will at least give you peace of mind. And what you learn may mean significant financial savings or better care for you or your family member in the long run.
To your family’s health, wealth and happiness!
David Feakes
P.S. Want to get started on the most important planning you’ll ever do for your family? Give our office a call at (978) 263-6900 to get started. You’ll be so glad you did.
David Feakes is the owner of The Parents Estate Planning Law Firm, PC – a law firm for families in the Acton, Massachusetts area. David helps parents protect the people they love the most. If you would like to receive David’s exclusive, free report, “Six Major Mistakes To Avoid When Choosing An Estate Planning Attorney,” you can get it right here.
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